Falling shares of IBM, AOL Time Warner and other shaken behemoths are not worth chasing, says a stock and bond-options trader known for his work with volatile securities.

"A couple of years ago, when you had pullbacks, you could buy almost anything and do well," said Dave Landry, a principal in Princeton, NJ hedge fund Harvest Capital Management. Pullbacks, essentially, are pauses in a security's trend or the direction a stock is headed.

These days, Landry sees a market almost destined to fall further and, with it, more red ink for many individual stocks. Landry, author of a trading system called the Volatility Explosion Method and research director at investor service TradingMarkets.com, is primarily a momentum trader. The concept of momentum applied to many day traders in the late 1990s when turbo-charged stocks logged sizeable gains almost every day.

Speaking from his Louisiana office, one hour north of New Orleans, Landry is on his guard. The hedge fund firm he advises, run by Ken Brown in Princeton, uses mostly futures-options contracts on fixed-income products. The Cornucopia Fund enjoyed a string of 15- percent-and-greater yearly returns, stretching back to 1997. Those hefty returns slowed to a trickle in 2001 when the U.S. Treasury bond market, zinged by mixed economic signals and supply concerns, experienced seismic shifts.

Individual investors mostly know 38-year-old Landry from his work on "swing trading," a slight variation on momentum-based investing. In swing trading, investors hope to profit from brief price swings in a security's price. Unlike day traders, who usually close their positions each trading session, swing traders hold their positions for several days, sometimes longer.

The concept of swing trading took off in the 1990s bull market, turning full-time momentum traders such as Denver-based Alan Farley and Malibu, California-based Jeff Cooper into authors and online professors of the craft. The idea, as Landry explains in a 241-page book, Swing Trading, is that 70 percent of a market's moves may occur during 20 percent of that market's duration. In other words, seize the moment, keep an eye on technical qualifiers like the Plus Directional Movement Index, which measures the upward movement of a market, and, basically, hang on for the ride.

Landry cringes at IBM, AOL
Landry, like most of the momentum crowd, does not try to pick "bottoms" in a market or a security. The overall U.S. stock market, he says, is still in a trend that points south. "I like to keep it simple. Most 6-year-olds can look at a chart of the market right now and figure out the right-hand side is lower than the left-hand side," he says. He warns bargain-seeking investors to steer well clear of IBM Corp. (IBM) and AOL Time Warner (AOL), two companies whose once-mighty shares are sliding lower each day. "I would still play the down side on these. I am not against the idea of AOL or IBM per se, but when they show weakness, it's a good time to be shorting them, not buying," Landry says.

AOL shares (at $22.10 three days prior to the writing of this article) were at their lowest point since mid-December 1998. Yet, the media company's stock market worth is still greater than $100 billion, providing short-sellers with plenty of room to make money as the shares keep falling. AOL's bread and butter, advertising revenue, depends on confident companies and consumers — both in short supply these days.

IBM's shares, with a swollen market worth of $155 billion, are another looming disaster. The computer company's revenues are slipping each quarter, and investors are becoming wary of IBM's accounting practices. Landry figures the company's stock (as low as $95.76 three days prior to the writing of this article) is setting up for another move lower.

He says the same thing about shares of Tyco International (TYC), the troubled manufacturer. Some Tyco bonds are trading at 10-percent-and-greater, par-value discounts. "I'd be waiting for another leg down on Tyco," he says about the company's common shares. Tyco executives, holding a weekly conference call with investors Tuesday afternoon, defended their accounting practices and fair-value adjustments of the company's various corporate purchases.

Landry's winners of late have been consumer non-durables, such as Deluxe Corp. (DLX), and home builders, such as Beazer Homes USA (BZH). He also has an eye on Ann Taylor Stores (ANN). "These are companies with tangible products; I guess they can't cook the books that easily," Landry notes.

Landry sees biotech stocks as vulnerable. The large money-center banks, Goldman Sachs Group (GS) and Bank One Corp. (ONE), are also potential big losers in coming weeks, he says.

Landry is quick to point out he is not in the business of predicting stocks. Instead, he identifies trends and entry points for buying or selling short a company's shares. He is puzzled by drug stocks, which usually benefit during rocky market periods. "There is no flight to quality in the drugs, and that tells me something — that I'm going to stay away from them for now," says Landry, who holds a Master's degree in business administration from the University of Southern Mississippi.

His parting shot is at the semiconductor group. "The overall sector looks better than the companies under the hood," Landry says. Computer chip makers are probably the industry most sensitive to the ups and downs of the digital economy. Many of the group's stocks are struggling in vain to reach the almost six-month highs they touched briefly in early January.

"I see lots of red flags when I look at these stocks, like Applied Materials (AMAT). That's one I wouldn't touch unless it got past 48," he said about the California-based semiconductor company. Applied Material shares were down 1 percent recently at $44.25.

Thom Calandra's Stockwatch column is available at cbs.marketwatch.com and ftmarketwatch.com.